Why Serial Acquirers Outperform

What makes some companies grow faster and stronger than the rest? One key strategy that has shown remarkable success is serial acquisition. Serial acquirers—companies that consistently buy other businesses—have a unique approach to growth that sets them apart. Over the past 20 years, these companies have significantly outpaced (PDF file) the broader market, achieving an impressive compound annual growth rate (CAGR) of 17.5%, compared to the S&P 500's 7.6% and the MSCI World's 5.9%. Even Berkshire Hathaway, a company known for its acquisitions, has grown at a 9.7% rate.

So, what makes serial acquirers different? Let’s explore the key factors that drive their success.

Related Publication: Why Founder-Led Companies Outperform

Expanding Through Acquisitions

One of the main strengths of serial acquirers is their ability to identify and buy companies that complement their own businesses. This approach allows them to quickly add new capabilities, enter new markets, or enhance existing product lines. For instance, Constellation Software, a Canadian software company, has acquired over 500 companies since its IPO in 2006, building a strong position in vertical market software .

By acquiring companies in related industries, serial acquirers create a powerful network effect. They not only grow in size but also gain an advantage by bringing together various services or products under one roof. This interconnected growth leads to better customer experiences and stronger market positions.

Efficient Use of Capital

Serial acquirers often have a disciplined approach to capital allocation. Rather than focusing solely on organic growth, they look for acquisition opportunities that offer strong returns on investment. Danaher Corporation, for example, has used this strategy effectively in its life sciences and industrial sectors, acquiring companies that add valuable expertise or technology to its portfolio. This efficient use of capital often leads to better returns for shareholders, as each acquisition is expected to add more value than the cost of the investment.

Building Diversified Businesses

Through acquisitions, these companies become less dependent on any single product or market. This diversification helps protect them against market fluctuations and downturns in any one area. Take Berkshire Hathaway, which has investments across insurance, railroads, energy, and consumer goods, among others. This broad exposure provides stability and minimizes the risk of being overly reliant on a single sector.

Some Top Serial Acquirers

Constellation Software (TSE:CSU)

Overview: Constellation Software is a Canadian software company specializing in acquiring, managing, and growing vertical market software (VMS) businesses.

Acquisition Strategy: Constellation has acquired over 500 companies since its IPO in 2006, focusing on niche markets where its software solutions serve specific industries, like healthcare, finance, and public administration.

Notable Acquisitions: The company acquires small-to-medium VMS companies, often targeting stable, profitable businesses with loyal customer bases. Constellation emphasizes decentralized management, allowing acquired companies to operate independently.

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Danaher Corporation (NYSE:DHR)

Overview: Danaher is an American conglomerate that designs, manufactures, and markets professional, medical, industrial, and commercial products.

Acquisition Strategy: Danaher uses the Danaher Business System (DBS) to integrate its acquisitions effectively, focusing on companies with high recurring revenues in fields like life sciences and diagnostics.

Notable Acquisitions: Some of Danaher’s transformative acquisitions include Pall Corporation (filtration and purification), Cepheid (molecular diagnostics), and Cytiva (formerly part of GE Life Sciences). These acquisitions have strengthened Danaher’s position in the life sciences and diagnostics markets.

Lifco (STO:LIFCO-B)

Overview: Lifco is a Swedish industrial company that acquires niche businesses in areas like dental products, demolition and tools, and systems solutions.

Acquisition Strategy: Lifco's approach involves acquiring smaller, market-leading businesses in fragmented industries. It allows them to operate independently while providing support for growth.

Notable Acquisitions: Lifco has expanded its presence in the dental sector through acquisitions of dental product distributors and manufacturers in Europe, along with various companies in the construction tools and machinery segments.

Ferguson plc (gettex:24W5)

Overview: Ferguson is a British-based distributor of plumbing, heating, and HVAC products.

Acquisition Strategy: Ferguson’s acquisition strategy is to target companies that expand their distribution network and product offerings, particularly in the U.S. market.

Notable Acquisitions: Ferguson has acquired smaller regional distributors in the U.S. to strengthen its presence and diversify its product range, such as the purchase of Columbia Pipe & Supply and other local distributors.

Brown & Brown (NYSE:BRO)

Overview: Brown & Brown is an American insurance brokerage firm that provides risk management solutions.

Acquisition Strategy: Brown & Brown actively acquires small and mid-sized insurance agencies, allowing it to grow its geographic reach and customer base.

Notable Acquisitions: Brown & Brown has made numerous acquisitions across the U.S., including Hays Companies, which expanded in the middle-market insurance brokerage space. The company focuses on keeping acquired firms' brands and management teams intact.

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Stryker Corporation (NYSE:SYK)

Overview: Stryker is an American medical technology company specializing in orthopedic implants, surgical equipment, and medical devices.

Acquisition Strategy: Stryker’s strategy involves acquiring companies that complement its existing product lines, particularly in high-growth medical sectors.

Notable Acquisitions: Stryker’s acquisitions include Wright Medical (focused on extremities and biologics), K2M (spinal implants), and Vocera Communications (healthcare communication solutions). These acquisitions have helped Stryker broaden its medical technology portfolio and increase its market share in specific healthcare niches.

TransDigm Group (NYSE:TDG)

Overview: TransDigm is an aerospace company that designs, produces, and supplies highly engineered aerospace components.

Acquisition Strategy: TransDigm focuses on acquiring companies with unique, hard-to-replace products that serve the aerospace industry. The goal is to expand its product range and tap into profitable aftermarket sales.

Notable Acquisitions: TransDigm has acquired companies like Esterline Technologies (advanced aerospace solutions) and Cobham Aero Connectivity. These acquisitions add specialized products to TransDigm's portfolio, allowing it to benefit from high-margin aftermarket revenues.

Microsoft (NASDAQ:MSFT)

Overview: Microsoft is a technology giant known for its software, cloud computing, and hardware products.

Acquisition Strategy: Microsoft’s acquisitions often aim to enhance its capabilities in high-growth areas like cloud services, gaming, and professional networking.

Notable Acquisitions: Key acquisitions include LinkedIn (professional networking), GitHub (software development platform), and most recently, Activision Blizzard (gaming). These acquisitions allow Microsoft to diversify its revenue sources and strengthen its position in critical markets.

The Results

As we can see, the companies above provide a compelling case for why the serial acquisition strategy works. By consistently making smart, strategic buys, they have built resilient, diversified, and fast-growing businesses.

This is not a financial or investing recommendation. It is solely for educational purposes.